Recession could be deeper than Reserve Bank expects: ASB

Monday, 17 April 2023

Finance Minister Grant Robertson faces questions about the economy after news it shrank 0.6% in the final three months of last year. (First published 16/03/23)

New Zealand’s recession could be deeper than initially expected, ASB’s economists said in their latest economic forecasts.

Late last year, the Reserve Bank predicted its “engineered recession” would mean the economy would contract by 1% over the 12 months from April, then flatline for another six months before returning to growth.

But ASB’s economists now expect the economy to contract by 2% by early next year.

ASB chief economist Nick Tuffley said there was a clear risk the recession would be sharper than the central forecast.

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A key driver of when a recovery happens will be the official cash rate coming down.

“Their base view was for a 1% decline but they were forecasting that before they got the -0.6% [drop in gross domestic product] in Q4. It means they’re already halfway there as it is.

“It does look like the pace of decline, at least as we see it, late last year and the first half of this year is a bit more than the Reserve Bank was anticipating. Even in their statement they just put out with the April official cash rate (OCR) increase they were suggesting they saw positive growth in the first quarter of this year – we see the risk that figure is another negative.”

Tuffley said inflation would remain above 7% through the first half of this year and might not return to the Reserve Bank’s target of 1% to 3% until 2025.

He said the driver of the downturn was the “kitchen sink” stimulus given to the economy during the pandemic.

“Things have overheated, and the stimulus to get us through the pandemic has been arguably too successful at keeping the economy running along, so now we’re feeling the effects of that and the economy being stretched.

“We expect rising living costs to add around $150 a week to household spending this year, and income growth is not likely to keep pace with this, despite another year of strong wage growth. It’s going to be a tough year, and home borrowers will feel these impacts disproportionately.”

ASB chief economist Nick Tuffley says the economy may contract more than expected.

Growth in the country’s main trading partners was expected to remain below average and there would be a sustained period of underperformance.

“Growth in Asia looks set to be relatively more resilient. And China looks set to grow at or above 5% this year and next, now that it has given up on its zero-Covid policy. However, that pace is still lower than the 6% to 7% China managed in the years leading up to the pandemic.”

He said export volumes would be “fairly flat” overall, over 2023.

Recent wild weather would spike inflation further due to temporary shortages of fresh food, household items and cars. The Reserve Bank would look through the short-term impact but would be concerned about people’s inflation expectations changing.

The rebuild would help the construction sector but that could still be some time away, Tuffley said.

“The rebuild will provide a lift in GDP over the coming years but we know infrastructure replacement can take a long time, as we saw with the Christchurch earthquakes, and particularly in cases where location and design need to be rethought to improve resilience.”

There were signs that consumers’ spending habits had changed, he said.

“During the lockdown period, there was a big spike in durables and furniture but spending is now shifting to experiences such as concerts and travel. People are spending less but also spending differently now because we’re able to do those things again.

“The continuing tourism recovery is another positive. We’re back to about two-thirds of pre-pandemic visitor numbers to New Zealand and there’s still some scope for markets like China to recover, so that’s really going to help our tourism and entertainment businesses, although we expect labour shortages to hamper growth.”

Tuffley said recovery would depend on how quickly the Reserve Bank started to cut interest rates and the speed of those reductions. It was probably near the peak of its increases now. “We’ve taken a fairly conservative view of how quickly rates will come down, assuming they will cut gradually in 25bps increments over time.”

The pace at which the labour market cooled would be an important factor, he said.

He said growth should hit an annualised pace a little over 3% by 2025.

”We’re expecting it to take until the start of 2025 to recover to where we were at the 2022 peak of GDP.”

But he said the labour market was in much better shape than during the global financial crisis and anyone who lost a job was more likely to be able to get more work.

Inflation was having a disproportionate impact on lower-income families, he said, with food prices a significant driver.

”Some impacts like that will be more challenging for low-income households that don’t have the financial reserves and flexibility and sometimes inflation hedge.”

There would also be a ratcheting up of pressure on households with mortgages at a time when the global economy was soggy, he said.